For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

Higher education is expensive—frighteningly expensive. For most parents, providing for their children’s college education is second only to retirement as their largest investment goal. But even with diligent saving, the first tuition bill may be shocking, so you may want to keep the smelling salts on hand.

To face this fear head-on, you first need a plan. With proper planning, parents may be able to tackle the college tuition bills in an organized and financially sound way. Think it’s impossible? It’s not. Recent research by Sallie Mae reports that families are paying less out of pocket for college as they take advantage of scholarships and grants.1

Vanguard’s new research, Tackling the tuition bill, provides a practical framework to help you develop a plan. In this blog post, I will explore the factors that affect financial aid eligibility. (I’ll provide tips in a second post on how to be a tax-savvy parent, maximizing federal tax perks while also considering how to spend tax-efficiently from assets earmarked for college.)

Surely at this point, you know that household assets and income affect financial aid eligibility but that these sources are not treated equally for student assets versus parent assets. The graphic below summarizes the key points—income matters more than assets, and student income matters more than parental income.

So what does this mean? Obviously, individual circumstances will vary, but here’s a savvy strategy:

Spend your student’s assets first. Because student assets affect aid eligibility more than parental assets (oddly enough, 529s owned by dependent children are considered parental assets), it can make sense to spend student assets before spending from a 529 plan. Such an approach gives 529 savings more time to compound tax-free. And by spending the more heavily penalized assets early, students increase their aid eligibility in later years, when inflation may boost tuition costs.

Tell the grandparents to hold off. Gifts from grandparents and others are considered student income, which has the greatest impact on your student’s financial aid eligibility. As a result, consider tapping those grandparent-owned 529s in the later years of college, when they will no longer be reported or considered in financial aid evaluations.

Maria Bruno

Maria is a senior retirement strategist in Vanguard Investment Strategy Group. She leads a global team that's responsible for conducting research and providing thought leadership on the topics of retirement, wealth, portfolio construction, and financial planning for individual investors. Maria specializes in retirement planning, retirement income solutions, and wealth management strategies. Prior to her current role, Maria worked in our financial planning and advice departments. Maria earned a bachelor of science in business administration (B.S.B.A.) from Villanova University and is a Certified Financial Planner™ professional.

Comments

Brian B. | June 1, 2017 6:41 pm

I’ve taken out 529’s on my two grandchildren (age 3&2) when they were born. I invested $50000 each at the time of their birth. The plans are doing great (Vanguard). My question is this: when college time arrives – should I keep the programs in my name, their fathers name or their name??? My financial advisor said wait until they qualify for any grants or etc (assuming they have no income or assets). After this point I can liquidate the funds for their education. Is this the way to go? Thanks for your input.

Kudos for getting an early start, Brian! Funding a 529 early is a great way to maximize the potential for growth, and 529 accounts can be a smart tool for estate planning as well. Assets that are owned by a grandparent with the student as beneficiary, such as 529 accounts, won’t impact financial aid the same way that student- or parent-owned assets would.

However, any 529 withdrawals for the benefit of the student will count as student income, which can have a significant impact on financial aid. For this reason, if the student is eligible for financial aid, it’s best to spend from a grandparent-owned 529 in the later years of a student’s college career when the spending will no longer impact financial aid.

A few caveats: This information applies to aid as determined by the FAFSA. If the chosen school uses the CSS/Financial Aid PROFILE application, the impact could be different. These rules can and do change, so it would be best to consult with an advisor closer to when your grandchildren begin college to determine the best course of action. Good luck to you!

Srini K. | March 8, 2017 9:01 pm

I have the question in the chart above. Retirement Contributions are listed as “income” under parent’s income section. I do not understand how my (parent) contribution towards my retirement savings be treated as income?

BUNMI M. | February 24, 2017 11:08 am

Hi Bunmi M., it sounds like you’re asking for advice on how a student can handle basic living expenses while studying and not employed. While this situation is never easy, we recommend that students create a strict budget, being careful to separate wants from needs. (Food is a need; cable TV is a want.) If there’s any money left over after accounting for the needs, then students can use that “discretionary” income to pay for wants or for investing. Good luck. We hope this helps.

TARA M. | February 11, 2017 12:03 am

I learned that it’s important to max your roth IRA (after 401k from work). This fund later can be used for education purpose without tax penalty. How does it work if I request Vanguard to withdraw to my Roth to pay tuition. How do I tell IRS that money is used for education purpose and later I won’t be penalized. It was suggested that I should use Roth IRA at the senior year of student. Please elaborate the process knowing Vanguard is not a tax advisor.
Greatly appreciated

I’m confused.
I have a Coverdell through TIAA, and they’re telling me they’ve never heard of a parental Coverdell ESA vs. a student-owned. They claim that all Coverdells are under the student’s tax ID and it’s impossible to have them listed as a parental, vs. student asset. How does one go about having the Coverdell classified as a parental, vs. a student, asset.

John L. | February 2, 2017 11:11 am

My granddaughter lives in Oklahoma and I live in Indiana. She is 12 going on 13. What is the best way I can help with her future university expenses. I have no idea where she will go to university but I doubt it will be in Indiana.

Great question, John. You don’t have to know (or have any idea!) where your granddaughter will attend school if you invest in a 529 college savings plan, which can be a great way to save for future college costs. Most 529s can be used to pay for any qualified higher-education institution in the United States and abroad. Individual states sponsor 529 plans—and you may qualify for additional tax breaks by investing in your home state’s plan—so we encourage investors to start their search there. Here’s some more information about finding a 529 plan: https://investor.vanguard.com/college-savings-plans/which-account. Best wishes to you and your granddaughter!

Ihor M. | January 17, 2017 10:57 pm

Jeff V. | January 13, 2017 1:52 pm

Here’s a question I feel blessed to be asking. What if you’ve saved enough for your child’s education, even at a private school, but they have 2 more years of high school left? Should the allocation go to bonds and a money market to avoid loss or should some stay in stocks to capitalize on market returns? I want to be neither greedy nor ignorant.

Great question, Jeff. It’s great that you’ve been able to save for your child’s education. Now that you’re getting close to needing the money you’ve saved, I’d start to focus on protecting your principal versus growing your assets. When you pursue growth, you’re taking on risk—and if you need the money soon, you’ll have less time to recoup any potential losses. Best of luck to you!

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.